Trailing Stop Loss

Trail stops exist to protect investors’ capital. But how exactly do they work, and how do you set a trail stop in your trading platform? That’s what you’re gonna learn in this article.

What is a Trailing Stop?

A trailing stop is a type of contingent or conditional order that allows traders to automatically adjust the stop-loss level for an open trade position. Unlike a traditional stop-loss that uses a fixed price level, a trailing stop moves the stop price in a direction that is favorable to the trade as the market price fluctuates.

How Trailing Stops Work

Trailing stops continuously monitor the market price and adjust the stop price at a predetermined amount or percentage away from the current market price.

As the price moves in a profitable direction, the trailing stop price level also moves, allowing the position to remain open and capitalize on favorable moves. This essentially allows the trade to “trail” the price higher while still protecting potential profits.

Benefits of Trailing Stops

A key benefit of using trailing stops is allowing profits to run while still protecting gains. Rather than using a fixed stop that could get hit prematurely, the trailing stop moves in sync with the price.

This helps prevent being stopped out too early only to see the price reverse back in a favorable direction. Trailing stops can help maximize profit potential while still managing risk.

Setting Trailing Stop Loss Levels

Traders can set trailing stop orders based on a specific dollar amount or percentage level away from the current market price. The optimal trail stop amount may depend on factors like volatility and trade objectives.

A tighter trail percentage or dollar amount reduces risk but also increases the chance of being prematurely stopped out during normal fluctuations.

Trailing Stop Loss Examples

As an example, a trader could set a trailing stop at $10 below Nvidia’s price after buying at $800, so with the initial trail stop loss level is at $790. If Nvidia moved up to $900, the trailing stop would adjust higher to $890. If the price then pulled back, the trader’s exit would be at the higher $890 stop price rather than the initial $790 stop, locking in more profits.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.